388. Memorandum From L.T. Wallace of the Council of Economic Advisers Staff to Hendrik Houthakker of the Council of Economic Advisers/1/

Washington, April 4, 1969.

SUBJECT
International Grains Arrangement

The IGA is an outgrowth of the Kennedy Round trade negotiations. The final text was developed and negotiated at the International Wheat Conference in Rome, July 12 through August 18, 1967./2/ The IGA replaces the 18-year old International Wheat Agreement (IWA)--and, more specifically, the International Wheat Agreement of 1962. The IGA consists of two parts, a Wheat Trade Convention and a Food Aid Convention.

The purpose of IGA is to provide for market stabilization, hopefully stopping actions like the wheat price war of 1965-1966 which was extremely costly to all exporting countries. Advantages to U.S. farmers were specified to be budgetary savings through reduced export subsidies and increased dollar earnings because of both stabilization of wheat prices and stabilization at a high enough level to insure profits.

Participation in IGA includes 33 countries and the EEC. These cover approximately 85-90 percent of the total commercial world wheat trade, as compared with only about 55-60 percent under the old IWA.

U.S. participation in IGA is similar to a treaty--and President Johnson submitted the IGA to the Senate on January 25, 1968.

Under the WTC both minimum and maximum prices for 14 major wheats moving in world trade are set. For the U.S. the new minimum prices are generally about 23¢ a bushel more than the old IWA minimums, and maximum prices are about 40¢ higher. The schedule of minimum and maximum prices f.o.b. Gulf ports is attached./3/

A Price Review Committee has the authority to establish prices for wheats not listed in the Arrangement (these wheats apparently were the initiating source of the present below-minimum-price-sales problem), and it also has power to adjust minimum prices in response to changes in competitive conditions. The old IWA did not have such a committee.

The IGA obliges, as did the old IWA, both exporters and importers to buy and sell at prices consistent with the established minimums and maximums.

The FAC is a major attempt to attack the global hunger situation by an agreement of commercial exporters and importers to provide a total of 4.5 million metric tons of grain annually to the needy nations of the world. The approximate percentage breakdown of contributions is attached./4/

Both Conventions of the IGA began a 3-year period on July 1, 1968.

Almost all of the major exporting nations have failed to live up to the Arrangement. Basically the reason is that the Arrangement is not structured to a condition of oversupply, and therefore all countries must lower prices if they are to vie for the given demand. Almost all nations have violated the IGA intent, if not its actual provisions, by loopholes found in classifying grades of wheat for export sale. Much of the problem can be traced to the initial setting of the price level, which did not consider a realistic estimate of the true production potential of the world's wheat countries. In effect a monopoly price is attempted to be maintained in a market climate much more resembling that of perfect competition.

Nobody seems to want to say that the Arrangement has broken down, though all agree that there have been continual violations. Assistant Secretary Palmby, USDA, set up a meeting for major exporters and grain industry interests, to meet in Washington April 2 through 4, to offer recommendations for improving the IGA.

This year represents a potential growth in wheat supplies. According to a Wall Street Journal article of March 17, 1969, "World wheat trade currently is running at its lowest level in five years, and grain stocks are building up to record levels in producing lands."

I will check my source first thing Monday morning to get the recommendations and tone of discussion from the meetings mentioned above.

Washington, April 10, 1969.

SUBJECT
Recalculation of Stockpile Objectives

On an accelerated basis an inter-agency committee, headed by the Office of Emergency Preparedness (OEP),/2/ is now recalculating stockpile objectives for raw materials on the basis of criteria approved last autumn by President Johnson./3/ This memorandum recommends that you suggest to General Lincoln that these recalculations be suspended until the new Administration has had an opportunity to examine the criteria. OEP has the authority under law for setting stockpile objectives and for directing that the General Services Administration (GSA) procure for or dispose from the stockpiles.

The US Government stockpiles some 55 basic commodities. Present inventories are worth at market value about $6.9 billion; on the basis of the "old" calculations, some $3.2 billion are in commodities excess to our needs. The last Administration sold surplus commodities: about $1 billion worth in Fiscal Year 1966, about $470 million in FY 1967, and about $210 million in FY 1968. Sales are continuing.

After prolonged but sporadic inter-agency study President Johnson at an NSC meeting last October 31 approved "new" stockpile criteria. (The "old" and "new" criteria are described in Tab B.) Various agencies, chaired by OEP, were requested to calculate new stockpile objectives by last January 20. Only nine objectives, for relatively minor commodities, were approved by January 20th. In March six more objectives were approved, mostly for minor commodities but also for two major ones, tin and rubber.

We have a number of misgivings about the way the new objectives are being calculated. The case of copper, on which we are now working, is a good example. Copper is one of the few commodities in which we are now under our stockpile objective; the current objective is 775,000 tons; the current inventory is 260,000. Under criteria approved by President Johnson the new objective could be as high as 1,150,000 tons --against which GSA, at OEP's direction, would have to procure copper. But if the new copper stockpile objective were calculated somewhat differently, in a way which we think might be feasible, it might be reduced by as much as 200-300,000 tons. That represents several hundred million dollars. On the basis of new criteria we also might have to procure such high-cost items as platinum and nickel, although calculations have not yet been made.

We are also concerned that the new criteria have not been checked with Senators Russell and Symington and Congressmen Rivers and Philbin of the Armed Services Committees of the Senate and House. In the past these Congressmen have been suspicious that stockpile assumptions and criteria might be biased so as to create larger surpluses for sale. Congressional criticism at some future date of the new criteria and objectives might cause revision of the objectives we are calculating now.

New stockpile objectives have important effects. The mere announcement of a new, higher copper objective would probably have a bullish effect on already high copper prices. If the USG procures copper, it will be competing with US consuming firms and, since the US is a net importer of copper, there will be an adverse effect on our balance of payments.

Further we have procured commodities in the past, only later to revise our objectives downward and then sell. Sales from our stockpiles have caused problems for the executive branch with both domestic and foreign producers.

We see no need to rush ahead on stockpile recalculations prior to a careful review of the entire matter by the new Administration. At a minimum, we would suggest a suspension in the recalculation of stockpile objectives. During the suspension period we should not procure commodities except those whose stockpile levels are critically low. But, because many firms now count on stockpile disposals, we probably should continue to sell in those cases where it is reasonably clear that there is little risk that we will be selling commodities we later might have to buy.

We also believe there would be considerable merit in going further and examining the basic premises of our stockpiling program. For example, are we stockpiling those things which we will need most in a national emergency? Could private industry play a greater role in our stockpiling program? There has not been a real review of the basic premises, at least not in recent years.

A review carried out by the new Administration could lead to stockpile objectives that would be generally higher than those approved on the basis of criteria authorized by President Johnson. We understand, for example, that General Lincoln tends to favor larger rather than smaller stockpiles. But whatever the outcome of a review, at least we might be confident that our subsequent work rested on reasonably solid assumptions.

That you sign the letter to General Lincoln at Tab A./4/

Criteria for the Calculation of Stockpile Objectives

The old stockpile objectives were calculated on the basis of civilian and military requirements during a three-year conventional war and on the basis of supplies that would be available from domestic sources and from a "contiguous" foreign area, i.e., Canada, Mexico and the Caribbean. Various factors were applied for concentration of supplies, shipping losses and other hazards.

Under the new criteria: (1) we would continue to assume a three-year war; (2) we would now assume that supplies would be available from foreign countries, other than Canada, Mexico and in the Caribbean, on the basis of "accessibility" determined by the Joint Chiefs of Staff and political and economic reliability determined by State; and (3) the Council of Economic Advisers prepared a more sophisticated projection of civilian economic activity and requirements than had been used previously. In addition, the President approved a recommendation by Governor Daniel, then OEP Director, that we would assume that supplies would not be available from other than domestic sources and the contiguous foreign area during Year I of an assumed three-year war. This recommendation, apparently reflecting Governor Daniel's concern about disruption of shipping during the first year of a war, was mentioned to other agencies but not staffed out prior to the NSC meeting.

We believe that, among other things, we should examine further the assumption that no account should be taken of supplies from non-contiguous foreign sources during Year I; if such supplies are ruled out during the first year, a case can be made for counting them in during Years II and III, on the grounds that they were produced although not shipped during Year I.

Washington, April 17, 1969.

Dear General Lincoln:

I understand that an inter-agency committee is recalculating stockpile objectives on the basis of new criteria approved last October 31 by President Johnson./2/ I would suggest that we suspend the recalculations pending a review by this Administration of those criteria.

I make this suggestion for several reasons. First, new stockpile objectives may lead both to new procurement programs and to new disposal programs involving hundreds of millions of dollars. Second, procurement and disposal programs, even when carefully executed, can have a significant impact on our balance of payments and on domestic and foreign suppliers.

Finally, I am told that the new criteria were approved so late in the previous Administration that there was no opportunity to check them with key members of Congress. I understand that certain Congressmen have been skeptical in the past about the calculation of stockpile objectives and have definite ideas of their own about the way objectives should be determined.

I would like to suggest that the criteria approved by President Johnson be reviewed at a future NSC meeting. Such a review would enable us, for example, to determine whether various assumptions made about the availability of foreign supplies are in line with this Administration's defense and foreign policies. We might also reexamine the projections of the US economy prepared by the previous Council of Economic Advisers, projections on which estimates of civilian and military requirements are based.

I would also hope that we could go further by examining more basic assumptions. For example, are we stockpiling the items which we are most likely to need in time of national emergency? Are there better ways of holding stockpiles? Could private industry, for instance, hold some of our stockpiles in its pipelines? It seems to me that we might wish to think about these questions carefully before announcing new stockpile objectives.

If we decide to suspend the calculations of stockpile objectives pending a review, I would recommend that during the suspension period we also suspend procurement for our stockpiles except for any commodities whose stockpile levels are critically low. Because many US companies now count on stockpile disposals, however, we might go ahead with current sales programs except in those cases where it is reasonably clear that we might be selling commodities which subsequently we later might have to buy.

We are ready to cooperate with you in any way we can to ensure that this Administration's stockpile objectives will be as realistic and as up-to-date as possible.

Sincerely yours,

William P. Rogers

Wellington, June 4, 1969.

My dear Mr President,

You will be aware of the recent adoption by the Senate Finance Committee of a Bill incorporating a rider which would amend the 1964 Meat Imports Limitation Act to include quotas for imports of lamb into the United States./2/

I want you to know that the New Zealand Government, which is attempting to strengthen its overall relations with the United States, would regard with the utmost concern any additional restrictions on its exports to your country. As I pointed out during my visit to Washington last year,/3/ New Zealand cannot be expected to play its full part in areas of international cooperation, including regional security arrangements to which the United States attaches importance, unless it has the trading opportunities which provide it with the economic means. There is a direct relationship between New Zealand's capacity to play its part as a good ally and its ability to earn from fair trading opportunities overseas. Restrictive action on New Zealand's exports to the United States makes it difficult for the New Zealand Government to justify to our people our alliance with the United States in other areas. To provide a further underpinning for this relationship I stressed that New Zealand--a country which has never received or asked aid from any other country--sought, not privileged treatment, but merely greater freedom to apply its competitive advantage in pastoral products.

It is within this context--of economic as well as political interdependence--that I ask you to consider the proposed legislation to impose quotas on lamb imports. Such a measure could, in my view, result in irreparable damage to the United States/New Zealand relationship. It is of vital importance to New Zealand, as the world's largest lamb exporter, to preserve unrestricted access to the United States market for this product. Lamb contributes substantially to New Zealand's export earnings. At present almost all dairy products are already under quota in the United States and exports of New Zealand's other major meat products to the United States are being limited to avoid quota action. Exports of agricultural products are responsible for the overwhelming bulk of New Zealand's overseas earnings, and in respect of the United States, lamb is one agricultural product for which New Zealand has a chance to develop its exports in a modest but, to us, significant way.

It is my firm belief that the volume of lamb which New Zealand is likely to be in a position to export to the United States will do more good than harm to the American industry. The domestic industry in recent years has consistently declined. Sheep numbers have been reducing at the rate of a million a year. Neither Government support for wool nor favourable market prices for lamb has induced the American industry to increase production. Imports have not offset this decline--far, far from it--and the amount of lamb in question is derisively small measured against the income level and meat-eating capacity of the United States. I would submit that, rather than constituting a threat to United States producers, New Zealand's promotion efforts, by preserving the extremely limited taste for lamb and extending that taste to new groups, offer about the only possibility of keeping the American industry alive.

New Zealand has gone about developing the trade in lamb in a responsible way over a period of years, incurring considerable expenditure in the process. Now an attempt has been made by a small group to render fruitless this effort and this investment. New Zealand has not failed to note the commitments of Administration spokesmen to include freedom to trade among the four economic freedoms which are to form the basis of United States trade policy during your term of office. Secretary Stans has spoken of the "dim view" which you take of quotas and other protectionist devices that may become permanent. I stress the point that New Zealand regards the issue of unimpeded entry of lamb as a talisman of this commitment.

In terms of this commitment and New Zealand's efforts to strengthen its overall relationship with the United States, my Government looks to your Administration to take an unyielding stand against the legislation at present before the Senate. I believe that there is no economic justification for the proposed quota action and that the issue is a quite simple one of foreign and trade policy considerations. I hope you will find it possible in this context to give tangible expression to your declared policy of trade liberalization and to the ANZUS Treaty and to make known, quickly and decisively, that legislative action to restrict lamb imports will not be tolerated by your Administration.

Sincerely,

Keith Holyoake/4/

The Joint U.S.-Canadian Committee on Trade and Economic Affairs held its 12th meeting in Washington June 25-26, 1969. Secretary of State Rogers and Canadian Secretary of State for External Affairs Mitchell Sharp headed the delegations, which included Cabinet-level agriculture and trade officials. According to the communiquéŽ issued on June 26, the International Grains Agreement was prominent on the agenda, and the United States and Canada agreed to consult bilaterally and with other concerned governments to restore stability in world grain markets. For text of the communiquéŽ, see Department of State Bulletin, July 14, 1969, pages 38-40.

On June 27 President Nixon and Canadian Prime Minister Trudeau met at the international boundary to participate in the 10th anniversary ceremonies for the Saint Lawrence Seaway. (National Archives, Nixon Presidential Materials, White House Central Files, President's Daily Diary) In a June 27 memorandum to Henry Kissinger regarding the President's meeting that day with Trudeau, Fred Bergsten noted that the Canadians, at the Cabinet-level talks that week, as well as the Australians (see footnote 2, Document 398), had urged the United States not to violate unilaterally the price minima of the IGA and to agree to a Ministerial meeting before taking any action. Bergsten added that the President could impress Trudeau by informing him of decisions he had made on June 26 regarding wheat and recommended that the President take the initiative to raise the issue with Trudeau. He also provided talking points for the President's use, one of which was: "I have directed that U.S. wheat prices are not to be cut from their present level, pending an intensive internal review of U.S. policy toward the International Grains Agreement and a Ministerial meeting among the major exporters to discuss the problem which we all face at the present." (National Archives, Nixon Presidential Materials, NSC Files, Country Files-Europe, Box 670, Canada, Volume I through 2/70)

Washington, July 3, 1969.

SUBJECT
International Grains Arrangement (re Ministerial Meeting on Wheat)

At the invitation of the United States there will be a Ministerial meeting to discuss the Wheat Trade Convention, which is a part of the International Grains Arrangement. This meeting will be held in Washington and is tentatively scheduled for July 10-11. The Task Force on Agricultural Trade, which includes the agencies listed at the end of this memorandum, has considered the options available to the United States. If you approve the recommendations at the end of this memorandum a position paper for the U.S. delegation will be drafted accordingly.

The International Grains Arrangement, which also includes a Food Aid Convention, was negotiated in 1967 as part of the Kennedy Round and went into force on July 1, 1968. The Wheat Trade Convention is essentially a minimum price agreement encompassing a number of different grades of wheat exported by the principal Free World producers (the U.S., Canada, Australia, the European Economic Community, and a few others). Because of the worldwide oversupply of wheat the Convention has led to problems almost from the start. Some of the principal exporters have gone below the minimum prices, and others have been compelled to follow suit in order to safeguard their traditional markets. Because the minimum price schedule is based on a grade of U.S. wheat we have been in an especially difficult position and forward sales of our wheat are abnormally low.

At a meeting in London last week the U.S. proposed suspension of the minimum price schedule but the other exporters were unwilling to support us. The Prime Minister of Australia sent you an aide-memoire urging us to keep the agreement alive and declaring a willingness to consider necessary changes./2/ Although our wheat experts are agreed that the long-run outlook for the Convention is poor we should not take the blame for letting it die without a further attempt to improve its provisions.

Canada and Australia are believed to be very anxious to uphold the agreement and would be prepared to take specific measures, including possible revision in its provisions. The attitude of the EEC, whose sales policy has been especially disruptive, is not clear, however. We believe therefore that our proposals to the Ministerial meeting, while constructive in themselves, should also be designed to place the onus of a future breakdown on any exporter who resumes price cutting (most likely the EEC).

The outcome of the IGA discussion also has important domestic implications. Unless we can ensure reasonable prospects for our exports the wheat allotment (soon to be announced) will have to be cut more sharply than will be necessary in any case.

The available options fall into two categories: the short-run options that could be agreed upon immediately to keep the agreement alive and the long-run options that would change the agreement more drastically and therefore would take more time to negotiate. From our point of view the short-run options should furthermore reinforce the competitive position of our wheat, while the long-run options should help us in maximizing our export revenues and fulfilling our international obligations.

Option 1: Maintain the status quo, i.e., freeze prices at prevailing export levels irrespective of the minimum price schedule).

(a ) It would reduce uncertainty in the wheat market, thus buyers would resume a more normal level of purchases.

(b) It would stop the trend toward further erosion of the IGA.

(c) It would provide a stable situation under which to work for a more basic solution to wheat trade problems by negotiating changes in the IGA.

(a) It would provide no relief from the present decline in U.S. wheat sales.

(b) It would provoke a strong negative reaction from U.S. wheat interests, aggravating the political problem connected with the impending announcement of an acreage allotment cut.

(c) It would make it easier for non-IGA members to undercut IGA member sales and thus to gain an increased share of the world wheat market.

Option 2: Unilateral price cuts by the U.S.

(a) It would enable us to maintain our share of the market, and in fact might lead to an improvement of our trade balance by as much as $75 million, provided other countries leave their prices unchanged.

(b) It would make an acreage allotment cut (which will be unavoidable even with favorable export prospects) more palatable politically.

(a) It would mean a continuation of present market uncertainty, which would depress near-term sales volume.

(b) It would further weaken the IGA.

(c) It might lead to a round of price cuts by wheat exporters, for which the blame would be clearly placed on us.

(d) It might involve somewhat higher budget costs.

Option 3: Increases in landed prices by other exporters (Australia and the EC).

(a) It would provide an immediate amelioration of the situation.

(b) It could provide a basis for later renegotiation of IGA price provisions (see Option 5).

(c) It would also help Canada.

(d) Any infraction could be easily detected, so that it could be used as a justification for our abandoning the minimum price schedule if this were in our interest.

(a) It would only represent a partial and temporary solution to our wheat trade problem and would not attack more fundamental inequities inherent in the IGA.

(b) It is doubtful the EC would agree, thus leaving one of the major sources of our market difficulties unaffected.

Option 4: Market sharing, which could take the form either of formal export quotas or of a concerted management of prices through a committee of exporters.

(a) It would provide the best means of ensuring that exporting countries maintain their historical shares in a limited market.

(b) It would avoid more complex problems involved in altering pricing and/or freight provisions of the IGA.

(a) It would be difficult to obtain agreement on division of the market (such a proposal was raised and rejected in IGA negotiations).

(b) There would be serious, if not insurmountable, technical problems relating to monitoring and enforcing the system.

(c) In the case of formal quotas the U.S. would be forced to institute a visible and quantitative export control system which would be politically difficult and legally questionable.

(d) It would stifle competitive market forces.

Option 5: Changes in the IGA price schedule (in the prices and/or wheats listed).

(a) It strikes at the real problem, i.e., altering the price provisions of the IGA so as more accurately to reflect actual competitive price relationships than in the present price schedule, which was established in 1967.

(a) It may involve long and difficult negotiations.

(b) Other exporting countries may refuse on the grounds that it involves a basic renegotiation of the IGA, which still has two years to run.

Option 6: Move from a basing point system to another basis of setting prices (e.g., to some form of destination pricing, under which landed prices would be the same regardless of origin, or of origin pricing, under which f.o.b. prices would be set for all exporters rather than only for the U.S.).

(a) Either form of this option would rectify certain f.o.b. price and freight disadvantages to the U.S. built into the IGA.

(b) Origin pricing would in theory correspond to an economically optimal pattern of production and transportation.

(a) This approach might lead to protracted negotiations.

(b) Since destination pricing would lead to equal CIF prices, there would be no real basis for competition among the exporters to a given importer. Importers might therefore consider themselves exposed to exploitation.

(c) Origin pricing might make it impossible for some exporters to supply remote areas, and thus also lead to some reduction in competitive forces.

Option 7: Obtain agreement by Australia and EC to hold stocks.

(a) It would relieve some of the immediate pressure on the world market from oversupply.

(b) It would provide for more equitable sharing of the burden of supply management, which at present is being done only by the U.S. and Canada to any significant extent.

(a) We have no means of bringing pressure on the other exporters to do this. For this reason it is unlikely that the EC would agree.

(b) Since the excess supply of wheat may be even greater in the future than it is now there is no economic rationale for storage.

For the short run we believe that option 3 (price increases by other exporters) holds the most promise of serving our interests. It fits in with the relatively tough line we think is needed, yet it represents a serious attempt on our part to rescue the agreement. If this option is accepted but does not work out we would have a clear case for going it alone. Option 2 (a unilateral cut by the U.S.) would be the second best; it carries a greater risk that the blame for scuttling the IGA would fall on us. Since option 1 (a price freeze) is unpromising, we would have to withdraw from the minimum price schedule if neither option 2 nor option 3 are accepted.

For the long run option 5 (revision of the minimum price schedule), which is the logical sequel to option 3, is preferred, with option 6 (a change in the basing point system) as the next best alternative. Both of them offer some promise of keeping the agreement in being, though world supplies may grow too much to make this feasible in the long run. In any case, our negotiators should present both these options as bases for discussion, without necessarily ruling out the less attractive options 4 (market sharing) and 7 (stock holding).

Paul McCracken
Chairman of the Council of Econmic Advisers

Nathaniel Samuels
Deputy Under Secretary of State for Economic Affairs

J. Phil Campbell
Acting Secretary of Agriculture

John W. Evans
Acting Special Representative for Trade Negotiations

Washington, July 7, 1969.

SUBJECT
Ministerial Meeting (July 10-11) on the International Grains Arrangement

The International Grains Arrangement (IGA) was negotiated in 1967 in conjunction with the Kennedy Round negotiations. It is essentially a minimum price agreement encompassing different grades of wheat. Because of the unexpected and rapid shift from world-wide shortage of wheat to a world-wide oversupply, there have been problems with the arrangement almost from the start.

The Department of Agriculture and the Department of State believe that the IGA works to the disadvantage of U.S. wheat exports. While the United States has refrained from selling wheat below the minimum price established by the IGA, other exporters have been playing footloose with the arrangement and have been selling below the minimum prices. Forward sales of U.S. wheat are abnormally low. Our share of free-world wheat sales this year have fallen from a traditional level of more that 40% to slightly more than 20%. In particular, the well-established U.S. market for wheat in Japan and Taiwan is threatened by EEC subsidized sales as well as Australian and Canadian shading of the IGA price.

At a meeting in London at the end of June, the U.S. normally proposed suspension of the IGA minimum price schedule but the other exporters were not willing to support us. The Prime Minister of Australia wrote to President Nixon urging that the IGA be kept alive./2/ He suggested a meeting of exporters at the Ministerial level to consider the matter. At the invitation of the U.S. Government, such a meeting is tentatively scheduled for July 10-11.

Australia and Canada are believed to be very anxious to maintain the IGA; Argentina has already oversold her crop and is no longer an exporter; but the attitude of the EEC, whose sales policy has been especially disruptive, is not clear. Our objective at the Ministerial meeting is to secure a short-term solution which will enable us to maintain our competitive position with regard to free-world sales of wheat. Moreover, if agreement is not forthcoming at the Ministerial meeting, we want to be in the position of placing the onus for the breakdown of the IGA on other exporters (most likely the EEC).

An inter-agency task force headed by Hank Houthakker has recommended to the President that at the Ministerial as a short-term solution we seek the agreement of Australia and the EEC that they will increase their landed prices./3/ The second alternative is unilateral price cuts by the United States. (This was considered the second best solution because it might lead to continued uncertainty in the wheat market and a round of price cuts by wheat exporters with the U.S. bearing the blame. However, there was also concern that it could mean increased subsidy payments and higher budgetary costs.) The most desired long-term solution is a change in the IGA price schedule but this will take more time to negotiate.

Washington, July 11, 1969.

SUBJECT
U.S. Position for the Ministerial Meeting on Wheat

The Ministerial Meeting on the International Grains Agreement (IGA) takes place here in Washington on July 10-11. You decided that we should avoid any unilateral price reductions, which could break up the Agreement, without a Ministerial to attempt to find a cooperative solution to the problem./2/ Secretary Hardin heads the U.S. delegation./3/

Attached at Tab A is a paper, prepared by the Agricultural Trade Task Force chaired by Hendrik Houthakker, which presents our options for the meeting and recommends a U.S. position./4/ It has been signed by Acting Secretary of Agriculture Campbell, Deputy Under Secretary of State Samuels, Acting Special Trade Representative Evans, and Paul McCracken.

All agencies agree that the United States is seriously disadvantaged by the present Agreement. Our wheat sales are off drastically from historical levels. We must therefore take a tough line at the Ministerial to assure restoration of our traditional position in the world wheat market. However, we also seek to maintain the International Grains Agreement for the longer term. If sufficient cooperation cannot be achieved to preserve it, we should seek to pin the blame for its breakdown on the other major exporters, particularly the European Community.

The present IGA was negotiated in 1967 as part of the Kennedy Round. It has two parts: one sets minimum and maximum prices for wheat trade among participating countries and the other is the Food Aid Convention (FAC) which multilateralizes food aid to the developing countries.

The price minima are under great pressure because world wheat supplies are much greater now than when the agreement was negotiated and because of the aggressive selling of some exporters. This pressure affects the U.S. more than the other exporters, because we were out-negotiated in the development of the pricing schedules which are the heart of the Agreement. All major exporters, including the United States, have now violated the minima to some extent.

The Prices Review Committee met in London two weeks ago to attempt to deal with the problem. The U.S. tried to get the other countries to suspend the minima so that we could compete without the confines of the Agreement. We were unsuccessful, but then announced that we would cut prices unilaterally anyway, producing a de facto suspension.

Canada and Australia (via Prime Minister Gorton's direct letter to you)/5/ expressed deep concern over our announcement and called for a Ministerial meeting to try to preserve the Agreement. The European Community and Argentina supported their proposals. We have agreed to the Ministerial but made it clear that we must have immediate relief for our competitive position.

The United States has three major interests in the problem: maintaining our income from wheat exports, preserving the Food Aid Convention, and minimizing acrimony with the other exporters. The last objective is difficult, however, because the European Community (essentially France) and Australia can take advantage of technical provisions of the agreement to undersell us.

An important and urgent consideration is our domestic political situation. Secretary Hardin needs to announce very shortly the National Wheat Allotment for the next crop year. This will call for at least a ten percent reduction in acreage on top of the fifteen percent reduction of each of the last two years, and he feels that a strong move to make U.S. wheat exports more competitive on world markets is necessary to minimize the political and economic costs of the cutback.

In the short run, we could:

1. Freeze the current situation, continuing to accept the disadvantages to us of the present pricing schedules.

2. Unilaterally cut prices ourselves. This could restore our competitive position but at lower prices for all exporters.

3. Get the other exporters to raise their landed prices back to the levels called for by the Agreement. This would restore our competitive position at higher levels, maximizing our farm income, while also fully preserving the Agreement.

For the longer run, the options are:

4. Market sharing among the major producers. This means that the major exporters would buttress the Agreement by dividing up most of the world sales among themselves by agreement. It would maximize our income but be very difficult to police.

5. Negotiated changes in the present price schedules to remove the disadvantages from which we now suffer. This would preserve the Agreement without its present obstacles to our sales.

6. Changes in the basic price-setting mechanism of the Agreement in such a way as to improve our competitive position. This would accomplish much the same as Option 5, and might be a necessary complement to it.

7. Build-ups of stocks by other exporters to bolster prices and give us an opportunity to increase our sales. Others would voluntarily withdraw from some competition; the large world wheat supply militates against its likelihood.

The agencies recommend that we:

1. Attempt to get agreement on Option 3, price increases by the other exporters. It would meet our wheat needs, preserve the Agreement, and provide us with justification for going it alone later if the promised cooperation were not sustained.

2. Be prepared to move to Option 2, unilateral price cuts, as a second-best way to restore our competitive position while preserving the legal framework of the Agreement.

3. Withdraw from the Agreement if neither Options 2 nor 3 are accepted. This would restore our competitiveness, but cause foreign policy problems because of the Agreement's importance to the others, especially Canada and Australia. By trying sincerely for the other options first, however, we could pin the blame squarely on the other countries for blocking a cooperative solution.

4. Express a willingness to consider all of the long-term options to put the Agreement on a viable basis, with preferences for Option 5 and then Option 6.

I recommend that you authorize Secretary Hardin to pursue the course of action which the agencies have recommended.

Approve/6/
Prefer other options, see me

Washington, July 14, 1969.

SUBJECT
International Wheat Negotiations

The five major wheat exporters (the United States, Canada, Australia, Argentina and the European Community) met in Washington on July 10-11 to find a solution for the problems besetting the International Grains Arrangement (IGA). The meeting appears to have been successful, though this cannot be said for certain until the European authorities in Brussels give their approval (probably on July 16).

The discussion centered on an Australian proposal to manage international wheat prices in such a way that each exporter will obtain a fair share of the market. This would be done through a newly established committee located in London. For the immediate future, Australia, whose wheat sales have done well under the IGA, offered to raise its export prices so that we and the Canadians (the principal losers) can recapture some of the traditional outlets for our wheat.

This proposal was finally accepted by the U.S., Canada and Argentina subject to concurrence by the EEC, whose delegates had to refer to Brussels. The EEC will also have to raise its export prices. Otherwise, it is understood that we will cut our prices unilaterally, which would be tantamount to destroying the IGA. The burden of preserving the IGA has consequently been shifted to Brussels, in accord-ance with our previously determined strategy. (See my memo of July 3, also signed by State, Agriculture and STR.)/2/

The Australian proposal is not ideal from our point of view (it combines elements of options 2, 4 and 5 in the July 3 memo). It provides a means of keeping the IGA alive, however, and perhaps even of strengthening it. More important, it promised to get us out of the position where we alone seemed to be bent on destroying the IGA, at the expense of our friends in Australia, Canada and Argentina. The Australian Deputy Prime Minister McEwen,/3/ who impressed everybody by his statesmanlike conduct, said privately that on political grounds he was very anxious not to let the U.S. appear to be the culprit. The Australians also believe that if the IGA can be made to work the Russians (now the principal outsiders) may want to join on a formal or informal basis.

From a domestic point of view the new agreement is valuable because it should safeguard our wheat exports and thereby make our wheat program less restrictive. Our delegation, led capably by Secretary Hardin and Assistant Secretary Palmby, can therefore be satisfied with its work. Our hope is that the EEC will come through with its part in the agreement, but even if we have to go it alone we will at least have the understanding of the other exporters.

In the longer run, however, the outlook for the IGA remains clouded. The agreement still has two years to run, but whether or not it survives we should start thinking about more viable alternatives.

Paul W. McCracken

Washington, July 19, 1969.

SUBJECT
Wheat Export Prices and Foreign Policy

Yesterday the Agriculture Department announced a new schedule of wheat export prices. This was the first action since you ordered wheat prices frozen upon the receipt of the Aide-Mémoire from Prime Minister Gorton./2/ In the meantime there was a meeting of the five wheat exporting nations, on which I reported in my memorandum of July 14./3/

The new wheat export prices are 12 cents per bushel below the old one on the standard grade included in the International Grains Arrangement. (There were cuts of different magnitude in other grades.) These moves have been made in consultation with Canada and Australia, though not necessarily with their full approval. A special provision was made for Argentina in order to prevent any problems in Latin America.

Although these are considerable price cuts they are not nearly as deep as the Agriculture Department wanted. They represent a compromise between our desire not to be blamed for the collapse of the IGA and the need to make our wheat more competitive in order to avoid a very restrictive wheat allotment.

It is possible, however, that the troubles of the Wheat Agreement may not be over. Despite the consultation with Canada and Australia the latest move may be considered as excessive by some countries. The European Economic Community in particular may feel aggrieved because it made a somewhat conciliatory offer to us which was not taken up. In Canada, moreover, the Trudeau government is in trouble with its western wheat growers, who have staged serious incidents during the last few days. If the IGA breaks down, and Canadian wheat growers are hurt as a result, we are likely to be blamed.

These troubles over wheat export prices illustrate two things:

1. The impossibility of preserving an international commodity agreement based on unrealistic assumptions concerning supply and demand.

2. The difficulty of reconciling domestic and foreign policy interests.

The Task Force on Agricultural Trade worked out the U.S. position for the ministerial exporters meeting/4/ and has continued to discuss the situation as it develops. Although the State Department is represented on the Task Force, it has unfortunately been quite difficult to determine where our foreign policy interests lie, and these may not have been fully taken into account. It might be desirable for you to reaffirm, to the agencies concerned, your interest in the foreign policy aspect of wheat negotiations.

Paul W. McCracken

Washington, July 22, 1969.

Dear Mr. Prime Minister:

I appreciate your having drawn to my attention developments in the world wheat trade and specifically those relating to the operation of the International Grains Arrangement./2/ I fully recognize the importance of wheat to Australia's trade and consequently of the effective operation of the Arrangement.

I should like to stress that my Administration desires, as you do, to maintain the Arrangement and to operate within its framework. The United States played an important role in the negotiations for the two conventions, the Wheat Trade Convention and the Food Aid Convention, which comprise the Arrangement. There should, therefore, be no disagreement between us that we should strive to work through the Arrangement to promote orderly trade in wheat at equitable prices.

Accordingly, I am pleased that we were able to support your initiative and to act as host for the recent meeting of wheat exporting countries at Ministerial level in Washington. Similarly, I am pleased that agreement was reached on arrangements which will strengthen our cooperation on wheat pricing while enabling us to sell our wheat competitively.

It is my hope that our two Governments will continue their close consultations and cooperation on matters relating to wheat.

Sincerely,

Richard Nixon

Washington, July 25, 1969.

SUBJECT
Wheat, International and Domestic

It is becoming increasingly probable that the international wheat market is headed for a price war. Our price cuts of last week have been followed to some extent by Canada and the Soviet Union. The grain trade is at a standstill, since traders are waiting for further cuts. The exporters committee set up at the Washington meeting two weeks ago has not yet met. The EEC has withdrawn its offer to cooperate, which was based on the assumption we would not cut our prices; however, there are indications of disagreement within the Community over the next steps./2/

If a wheat price war breaks out, the world price of wheat will undoubtedly fall to the level of feedgrain prices, which means a decline of another 20¢ a bushel. Feedgrains, of which we are the major exporter, will probably also fall. The effect of all this on our balance of payments and on our budgetary costs will be considerable, probably on the order of $200 million per year.

It appears, therefore, that further efforts should be made to prevent a price war. The EEC has proposed another Ministerial meeting, but this would be of doubtful value. Our counterproposal is to activate the London Committee, which is strongly supported by Canada and Australia.

The reductions already made in wheat export prices are probably irreversible. They should therefore be reflected in our decisions concerning the domestic wheat program. If we cannot sell our wheat at remunerative prices, it is clear that the case for a substantial cut in the wheat allotment is made even more compelling. I, therefore, support the Budget Bureau's preference for a 16% cut in the allotment, as opposed to the 10% cut favored by Agriculture.

Since the loan rate on wheat (not to be confused with the support price, which is fixed by law) is supposed to equal the world price, it would also be appropriate to reduce the loan rate by at least 10¢ a bushel. Although this will have only a minor effect on farm income and budget expenditures, it will serve to bring home the fact that a wheat price war will be partly at the expense of our own wheat growers. Unless the loan rate is changed the wheat growers and the Department may be led to expect that we are prepared to subsidize our wheat exports without limit.

Paul W. McCracken

In a July 26, 1969, message to President Nixon, Canadian Prime Minister Trudeau referred to U.S. and Canadian efforts to cooperate in bringing stability to the grains market and the IGA, and indicated he thought the current situation could lead to a breakdown in cooperation and the collapse of the agreed pricing system. He wrote that Canada would maintain its prices pending an assessment of the situation by the wheat exporters at a London meeting proposed for August 1, but implied that if the situation deteriorated further Canada would have to act. The message was transmitted under cover of a brief letter from Canadian Ambassador Ritchie to Acting Secretary of State Richardson, July 26. (National Archives, RG 59, S/S Files: Lot 72 D 320, Canada: Trudeau to Nixon 7/26/69)

Attached to Trudeau's message and Ritchie's letter is an undated message from Secretary of State for External Affairs Sharp to Secretary of State Rogers. Sharp referred to Trudeau's message to the President and the recent Cabinet Committee meeting in Washington (see Document 392) as examples of the seriousness with which the Canadian Government regarded developments in the wheat market. He wrote that he feared "we are now on the brink of a chain reaction we will live to regret" and hoped continued cooperation would be possible. Sharp informed Rogers that he had sent a message to the President of the EEC Commission urging "the greatest restraint on their part at this time." (National Archives, Nixon Presidential Materials, NSC Files, Country Files-Europe, Box 670, Canada, Volume I through 2/70)

In a July 28 memorandum informing the President of Trudeau's message, Kissinger noted that the current U.S. position was fully responsive to the Canadians and that the United States planned no further price cuts prior to the August 1 London meeting. Kissinger thought no response to Trudeau's message was required at that time. (Ibid.) Other documentation, which points to Canadian price reductions making proposed courtesy replies inappropriate, is ibid., RG 59, S/S Files: Lot 72 D 320, Canada. No Presidential reply to Trudeau's July 26 message was found.

Washington, August 2, 1969.

SUBJECT
WHEAT--Briefing and Talking Points for Your Meeting with Prime Minister [President] Pompidou

Pompidou recently told Ambassador Shriver that wheat was the only outstanding issue between the U.S. and France./2/ He was referring to the breaching of the price minimums for wheat contained in the International Grains Arrangement (IGA), which we think was started by the EC but which they claim was begun by U.S. Some newspapers have labeled the problem a US-EC (meaning French) "price war" and Pompidou's comment was undoubtedly based on his experts' testimony that the U.S. was to blame.

Talking Points: (If you wish to respond substantively)/3/

1. It is my understanding that all of the exporting countries wish to preserve the IGA and have been making repeated efforts to try to find a way to do so. However, it is obviously difficult to do so in view of present world surpluses of wheat.

2. I hope that the Technical Group decided upon in London on Saturday will help in that process.

3. (If Pompidou were to mention the recent U.S. price cuts) The U.S. stated clearly at the Ministerial meeting in Washington on July 10-11 that we would have to cut prices to regain our competitive position unless others raised their prices. No one raised. We were thus genuinely surprised at the EC reaction when we made our adjustments.

The IGA developed from the Kennedy Round. Its core is a set of minimum prices which each exporter is supposed to maintain. The Agreement biases the wheat trade against the U.S. (and Canada), however, for several highly technical reasons. And it lacks any mechanism for sharing markets when prices are at the minimum.

These problems became critical with the massive overproduction of the last two years. There were only two alternatives: price cuts below the minimum in response to market pressures or exporter cooperation to sustain prices by effectively sharing markets. A series of meetings has sought the latter but failed, in large part due to the inability of the EC to really control its wheat traders as well as its reluctance to give up its favored position under the IGA, and hence its retreat to the strict legalisms of the (biased) Agreement.

The August 1-2 meeting in London agreed to set up a technical group which might be able to get at some of the technical inequities in the Agreement. More ambitious U.S. proposals to save the IGA again foundered on EC reluctance/inability.

Australia--which is also favored by the IGA--was a problem earlier, but considers the Agreement so important politically that it is now playing ball. The result is an apparent confrontation between the Anglo-Saxons (U.S., Canada, Australia) and the EC which some of the press has tried to sensationalize as a US-EC "price war".

Further price cuts are quite possible in view of the lack of exporter cooperation. They need not carry "price war" connotations if handled properly, but they may very well remain a serious irritant in US-EC (especially US-French) relations until the market situation changes significantly or the Agreement can be re-negotiated.

Washington, August 5, 1969.

SUBJECT
The International Wheat Situation and Its Domestic Implications

The wheat situation continues to be very unsettled. The EEC reduced some of its export prices in retaliation for our cut of July 18, but the European cut was not as deep or as extensive as we expected. On Friday and Saturday the five leading exporters, (the U.S., the EEC, Canada, Australia and Argentina) met in London. Although little concrete progress was made the atmosphere was good and press talk of a "price war" is premature. Another meeting is scheduled for August 11.

Behind the apparent calm the danger of a major confrontation with the EEC and of friction with Canada, Australia, Japan and Brazil remains as real as ever. We have sold little if any wheat for several weeks now, which increases the impatience of the U.S. Department of Agriculture to make further cuts. Since the other exporters would undoubtedly follow us down, it is not clear that we would sell any more wheat as a result. The EEC would have further evidence for its accusation that we are bent on wrecking the International Grains Agreement, and we would lose the support of Canada and Australia. On the other hand Japan and Brazil, both major importers, are complaining that we have reduced prices to Europe but not to them.

The IGA crisis is also beginning to have domestic repercussions. Senator McGovern last week urged the Administration to uphold the agreement; Senator Mansfield is reported to be of the same opinion. The announcement of the 1970 wheat program is already overdue; it will undoubtedly generate more heat.

The interagency Task Force on Agricultural Trade is preparing an options paper for the Cabinet Committee on Economic Policy./2/ Pending a consensus on this matter it would be highly undesirable to cut wheat prices any further. If you agree, I suggest that Secretary Hardin be informed of this.

Paul W. McCracken

The President met with the Cabinet Committee on Economic Policy from 9:35 a.m. to 12:35 p.m. on August 12, 1969, at the Western White House in San Clemente. (National Archives, Nixon Presidential Materials, White House Central Files, President's Daily Diary) According to Alexander Butterfield's summary of the discussion of U.S. wheat prices to Japan and Latin America, the Committee noted that on July 18 the United States had announced a reduction in wheat prices for exports only to Europe and the Mediterranean, and that Japan and Brazil had complained, the former bitterly. The summary reports that the Interagency Task Force on Agricultural Trade had reached the unanimous conclusion that wheat prices should also be reduced for Japan and Latin America. (Ibid., White House Central Files, Houthakker, Box 19, Wheat-Wheat Pricing)

Australian Deputy Prime Minister and Minister of Trade and Industry McEwen, in response to a Parliamentary question on August 13, indicated that a U.S. decision to reduce prices for exports to Japan and Latin America had been made, and that the Australians had been promptly informed. McEwen informed Parliament that Secretary of Agriculture Hardin had called at President Nixon's request to inform him of the decision taken at San Clemente that day. McEwen explained the path and rationale of U.S. price reductions, and said the Australian Wheat Board immediately would take appropriate steps to adjust its prices. He reported that Hardin had given assurances that the official U.S. policy was to preserve the International Grains Agreement, and that he had responded that to remain competitive one had to meet the prices of one's competitors but that "the high objective should be that when the forces of competition made it possible to do so there should be a return to the prices of the International Grains Agreement as originally negotiated." A copy of the Parliamentary question and McEwen's answer was forwarded to Henrik Houthakker under cover of an August 14 transmittal slip from the Commercial Counselor of the Australian Embassy, A.J. McGoldrick. (Ibid.)

Washington, undated.

Dear Mr. Chairman:

Reference is made to your request for the views of this Department on S. 2400, "To revise the quota-control system on the importation of certain meat and meat products."/2/

The proposed legislation would limit the imports of meat and meat products described in items 106.10 (cattle), 106.20 (goats and sheep, except lambs), 106.30 (lambs), 107.40, 107.45, 107.50, 107.55 and 107.60 (prepared or preserved beef and veal except sausages) of the Tariff Schedules of the United States to the average aggregate quantity of such articles imported during the calendar years 1965, 1966 and 1967, subject to an adjustment based on the percentage of increase or decrease in the domestic production of such products in that year and the two preceding years in comparison with the average annual domestic production during the years 1965-1967. It would also give the President discretionary authority to impose quotas on meat and meat products other than those enumerated above and would repeal Public Law 88-482/3/ which limits imports of the products covered by items 106.10 and 106.20.

The Department believes that the existing law and voluntary quota system provide adequate protection for the domestic industry. Furthermore, the imposition of a quota would tend to have retaliatory effects. The Department is, therefore, opposed to the enactment of S. 2400.

The Department has been advised by the Bureau of the Budget that there is no objection from the standpoint of the Administration's program to the submission of this report to your Committee.

Sincerely yours,

Paul W. Eggers/4/

Washington, September 24, 1969.

AIDE-MEMOIRE

Further to the discussions last week between the Prime Minister of New Zealand and the President of the United States and the Secretary of Agriculture on the subject of United States meat imports,/2/ the New Zealand Embassy takes this opportunity of presenting the following views to the United States Administration.

While overall meat production in the United States is rising, there is already evidence of an inadequate supply of manufacturing quality beef. It has been estimated that United States production of this kind of meat will decline by over 150 million pounds from the 1968 level during 1969, 1970 and 1971. Simply to maintain supply to satisfy the consumer demand for the normal annual increase of 2-1/2 per cent would require additional imports of between 150 million and 200 million pounds a year. If, in those circumstances, imports are not allowed to supplement domestic production, the result will be severe price increases for meat products of a kind--hamburgers, frankfurters, etc.--particularly consumed by lower income families, or, conceivably, the rapid development of meat substitutes.

As we see it, there is no serious prospect of this deficit in supplies being filled by increased production in the United States. The dairy herd--a major domestic source of manufacturing quality meat in the past--continues to decline and milk cow numbers in the United States are at the lowest level since 1887. The production in the United States of other lean grass-fed beef comparable to the imported product also continues to decrease.

Exporting countries, however--New Zealand and Australia in particular--can supply increased quantities of manufacturing meat at reasonable prices, and access to the United States market for this product is vital to the future of our cattle industries.

In New Zealand's view these considerations add up to a strong case for improved provision for imports of manufacturing quality meat into the United States. There are several ways in which this could be achieved; for example, by repeal of the 1964 Meat Import Act. In the immediate situation there is scope for increasing the quantity of meat which could be imported under the voluntary restraint arrangement and the New Zealand authorities urge that this possibility be carefully examined.

The New Zealand authorities note that some livestock and meat prices (at wholesale level) have declined in recent weeks. Analysis of the situation shows that these reductions have been for cattle and meat of feeder and choice grades, i.e. high quality table meat. At the same time, however, prices for canner and cutter grade cattle, and boneless meat for manufacturing, have remained at or near earlier high levels, confirming continued high demand and a shortage of this type of meat.

Pending a decision on the level of imports to be permitted in 1969, the New Zealand authorities are most concerned that the Administration take every necessary step to ensure that other suppliers do not exceed the restraint levels of the voluntary arrangement. The Embassy recalls that in its Note of 27 December 1968, notifying its acceptance of the arrangement,/3/ the New Zealand Government set down its view that it would feel free to reassess its position should the situation develop where the intent of the restraint programs was being frustrated by the actions of any other exporting country.

The Embassy takes this opportunity also to underline the expectation of the New Zealand Government that the Administration will reallocate to the four countries which signed bilateral agreements on meat with the United States in 1964, the expected shortfall in supplies of meat from Canada. The New Zealand authorities are disturbed to learn of the view which has been expressed in some sections of the Administration that a net shortfall only will be reallocated. In New Zealand's view such an approach would be entirely contrary to the understandings reached in December 1968. It would mean that supplying countries which did not choose, or were not able, to carry out their undertakings, would be placed in a favorable position of the disadvantage of other suppliers, including New Zealand, which were living up to the undertakings entered into. New Zealand regards the December commitment on shortfalls to mean any estimated shortfall from any supplier would be reallocated and it expects the Administration to reach its determination accordingly.

Looking ahead to 1970, the New Zealand authorities would hope that the United States Administration will see its way clear to finding ways of improving access to the market. In the absence of any other satisfactory arrangement, New Zealand would prefer, however, to see continuation of the voluntary restraint arrangement with New Zealand's share of the market fully reflecting our position as a traditional supplier. If, in any event, mandatory quotas came to be triggered or otherwise brought into effect, New Zealand is most concerned that full account be taken in the determination of market shares of its place in the market before the 1964 law was enacted.

Washington, September 24, 1969.

Dear General Lincoln:

Representatives of this Department have been discussing with Deputy Director Russell of your Office possible action which the Treasury might take to alleviate domestic shortages of nickel resulting from the industry-wide labor strike in Canada. It has been suggested that the Department of the Treasury make available a portion of the nickel stockpile of the Bureau of the Mint. Additionally, the question has been raised as to whether it would be possible for the Office of Foreign Assets Control to authorize under the Cuban Assets Control Regulations importations of nickel oxide and refined nickel from France.

The Mint's current stockpile of approximately 40 million pounds of nickel is adequate for purposes of meeting our projected needs for an estimated period of four years. This four-year estimate contemplates approval of new legislation for production of a quantity of cupro-nickel dollars and half-dollars. A substantial reduction in our nickel stockpile, coupled with a prolonged strike within the nickel industry, could create a nickel shortage for Treasury within two years. Accordingly, release of a portion of the Mint nickel stockpile would not be now feasible. Further, we do not have legal authority to sell, loan or otherwise make available nickel from our stockpile for use by private industry. Special legislation would be required for us to make such an accommodation.

The Cuban Assets Control restrictions on the importation of nickel and nickel products from France have been imposed as a consequence of the substantial purchase of Cuban nickel by Societe Le Nickel (SLN), the sole French producer of nickel. We have asked the Department of State to explore immediately with SLN the existing situation, including stockpiles of Cuban material on hand in France, and SLN's planned imports from Cuba and Caledonia. If it is clear from these discussions that SLN has used up its Cuban stockpile and does not anticipate further imports under the existing contract, it would then be possible for Treasury to terminate all restrictions on nickel imports from France.

If the importation restrictions could not be generally removed, inquiry was made as to whether Treasury could authorize (i) imports of nickel oxide for certain civilian consumption to avoid employee lay-offs, or (ii) nickel imports for priority defense production needs. If the essential facts have not changed, thus not warranting termination of all restrictions, I do not believe it would be advisable to make exceptions authorizing importation of nickel oxide for civilian consumers.

Regarding defense production requirements, if it appears from the Department of State's discussions with SLN that the latter has supplies of nickel available for sale to the United States for defense production needs, it would then be necessary, I believe, for the National Security Council to make a decision as to whether it would be preferable to authorize a release of nickel from the national stockpile for common defense needs, or alternatively to authorize such imports of nickel and nickel products from France.

Substantial domestic and foreign policy problems will arise from any relaxation of our current policy restricting imports of nickel subject to Cuban Assets Control regulations. Any action affecting domestic nickel supplies should be carefully considered, because it might appear to be a strike-breaking action.

With best wishes,

Sincerely,

David M. Kennedy/2/

Washington, September 25, 1969.

SUBJECT
Meat Imports

Under law, the Secretary of Agriculture is required to make an estimate of meat imports by September 30. If in excess of 1,087 million pounds, the estimate triggers meat import quotas under the Meat Import Act of 1964. Previous quarterly estimates have been kept below the trigger point on the basis of export limits undertaken by supplying countries. Honduras has, however, exceeded its limit, and the ceilings of a number of other countries are under pressure. The estimate which the Secretary of Agriculture is to make will depend on the position taken on the voluntary export arrangements./2/

There are five basic options outlined in the accompanying paper./3/

1. (a) Take a hard line on the present export limits, which provide for total meat imports of 1,035 million pounds.

(b) A variant would provide for a strengthening of our stand with the use of Section 204 of the Agricultural Act, involving quotas on the imports of countries exceeding their export ceilings.

2. Increase the limits under the export restraint program above 1,035 million pounds, but still below the 1,087-million-pound level.

3. Trigger the quotas (with an estimate over 1,087 million pounds), and keep them as close a possible to the 988-million-pound level specified by the Meat Import Act.

4. Trigger the quotas, but raise them significantly.

5. Trigger the quotas, and suspend them.

The Agriculture Department favors the first line of action. The Secretary of Agriculture believes that any other course of action will result in beef quotas on a permanent basis, will fan the flames of protectionism both in U.S. agriculture and in industry, and will provide a poor introduction to the restructuring of farm policies. (The views of the Secretary of Agriculture, and of other agencies, are explained in more detail in the attached memoranda.)/4/

The Department of State favors options 5, 4, and 2, in that order. An increase in imports would be helpful for our relations with the exporting countries, and there is economic justification for an increase because of the high prices of meat. Because most imports are of the lower quality beef consumed primarily by lower income groups, and because the price of this lower quality beef has risen at a higher rate than the prices of higher quality meats, an increase in imports is particularly appropriate.

The Special Representative for Trade Negotiations favors option 1.(a), a hard line on the voluntary agreements without the use of quotas under Section 204. Other acceptable options are 2 and 5. The use of import quotas by the United States, either under Section 204 (option 1.(b)) or under options 3 or 4, would be adverse to our trade policy interests.

The President's Committee on Consumer Interests views option 5, involving the elimination of quantitative restraints on meat imports, as theoretically the best for the consumer. However, because of domestic political factors, they would favor option 4. They note that the total supply of manufacturing grade beef has not kept pace with our rising population, resulting in inflated prices for hamburger and other inexpensive meats which are important in low-income diets.

The Commerce Department does not take a formal position on the options, but leans toward option 2, as does Treasury. Treasury also would be inclined to use Section 204 against Honduras./5/

The Council of Economic Advisers favors option 5 or option 2. In our view, import restraints are undesirable, particularly in the light of the high cost of low-grade meats. While option 5 is the most desirable on economic grounds, there is something to be said for option 2, since it involves a less drastic break with the past, and can be used as a means of temporizing until more fundamental decisions are made on the Administration's position on meat imports. It must be noted, however, that the recent price levels of meat make this a particularly opportune time to relax our import policy significantly. This opportunity may not repeat itself at a later date. (The Meat Import Act requires a quarterly estimate of imports, which means that the question will come up again in 3 months.)

Thus, there is some support for all the options, with the exception of 3.

It should be stressed that the primary significance of the decision will not be economic (although its effect on our general trade policy may ultimately have significant economic effects). The difference between the meat imports under the most restrictive feasible policies and the most liberal is quite small. In 1970, a carry-through from option 1 would involve imports of about 1,050 million pounds. Without quantitative restraints, it is estimated that imports would be in the neighborhood of 1,300 million pounds. Thus, only about 250 million pounds are in question--amounting to about 1-1/2 percent of the domestic market.

The key questions are political. How are the interests of domestic consumers and foreign policy considerations, on the one hand, to be weighed off against the interests of domestic cattle producers, on the other?

Paul W. McCracken/6/

Washington, September 29, 1969.

SUBJECT
Meat Import Policy

At Tab I is a memorandum for the President on U.S. meat import policy,/2/ which has been brought to a head by: (1) the need to determine the allowable import level for the fourth quarter; (2) Honduras exceeding its permitted export level under the present voluntary restraint program; (3) a letter to the President from Prime Minister Gorton;/3/ (4) Prime Minister Holyoake's raising the issue with the President while here recently;/4/ (5) the forthcoming IA-ECOSOC meetings/5/ at which this will be an important issue. A decision is needed within a couple of days because the Secretary of Agriculture is required by law to take a position on meat imports on September 30 (which can slip a day or two).

It is impossible to temporize because of the Honduran overshipments: We must either crack down on them or increase overall imports to provide a cover for their violations. In addition, postponing a fundamental decision would carry us past Gorton's election and the IA-ECOSOC meetings because the immediate decision will determine policy for the fourth quarter and, for market reasons, we could not then announce a change in policy until the end of the year.

The issue is an analytically simple tradeoff between foreign policy-consumer interests and domestic producers. The main elements are:

The major immediate problem is with Honduras. Unless we liberalize, we will have to hit them hard. This would be blown out of proportion in Latin America generally and sour the atmosphere for IA-ECOSOC, especially since Latins are focusing heavily on trade in that context. Guatemala and Nicaragua have also officially asked for increased allocations although they have taken steps to stay within their present ceilings and avoid U.S. retaliation.

These individual Central American countries are minor suppliers but Latin America as a whole accounts for about 20 percent of our beef imports. Some of their cattle industries have in fact been supported by our AID program as an important step in diversification of their economies. The Latin Americans asked for increased access to our meat market in the CECLA document and the Rockefeller Report recommends that we meet this request.

Gorton has personally asked the President to allow an increase in Australian meat exports to the United States in time to boost Australian meat prices before his October 25 election. He notes that meat is Australia's leading export to the U.S.; that Australian meat does not compete directly with U.S. meat; that U.S. prices of imported meat have continued to rise; and that meat prices in Australia could drop sharply if the U.S. does not permit increased imports because Australia has already met its permitted level for the entire year.

John Holdridge adds that Gorton's concern over the possible adverse political effects is indicated by his personal letter to the President. Although he has used this device before, this time it probably does denote a sense of urgency--for the first time in years, the Australian Labor Party seems to be building up a real political challenge and Gorton may need every vote he can get.

Holyoake made meat, along with Vietnam, the major topic in his recent discussions with the President and he reported upon returning home that increased trade opportunities were the major result of his visit. He is facing general elections on November 29 and is in trouble with sections of the New Zealand electorate as a result of his strong support for our Vietnam policy.

The New Zealand Embassy presented us with an aide-mŽmoire last week to press the case./6/ They undoubtedly regard meat as the first test of Secretary Rogers' recent pledge that we will take their views into account in forming our own economic policies.

(a) Under any solution other than Option E, which would eliminate all controls, we will face the perennial problem of allocating quotas or "voluntary" restraint levels. Both the traditional suppliers (Australia, New Zealand, Ireland, and Mexico) and the late starters (the other Latin Americans) feel that their present shares are too small. The only way to allocate without raising major problems with some supplier is to increase the size of the overall market so that each will gain in absolute terms.

(b) Liberalization of meat imports would be the first concrete step in pursuit of the Administration's avowed interest in freer trade and would therefore be applauded generally as well as by the direct beneficiaries.

There are several strong arguments from the domestic side in favor of increasing imports:

(a) Prices of the type of meat which is imported have continued their sharp rise although prices of domestically produced meat have fallen from their June highs. Greater imports would thus contribute to the overall anti-inflationary effort (although their effect would be marginal and largely symbolic). It is precisely this kind of situation under which the present Meat Import Act permits an increase or suspension of the statutory quotas (Options D and E, respectively).

(b) Imported meat is mainly ground into hamburger and frankfurters, and thus primarily helps lower income groups.

(c) Imported meat differs in quality from domestically produced meat and does not directly compete with it. The complaints of our cattle industry are therefore not very justifiable.

With the concurrence of Pete Vaky and John Holdridge, I strongly recommend that you recommend to the President that he choose Option E--suspension of the quotas. This course is favored by State, CEA, and, of course, by Consumer Representative Mrs. Knauer.

Secretary Hardin strongly opposes any liberalization, however, and opts for A. It can be safely predicted that Bryce Harlow and Peter Flanigan will agree with him. (The memorandum for the President anticipates these views.) I am not sure where Arthur Burns would come out.

Because of this strong opposition, we recommend a fallback if necessary to Option B--which would allow a 5 percent increase in imports under the present voluntary restraint system. This would avoid a confrontation with Honduras and give something to all of the suppliers. It would cause allocation problems but at least in the context of an increased total. It would not hurt the domestic cattlemen although they can be expected to protest anyway. This position is favored by Commerce and Treasury, neither of which is very close to the issue, however, and is acceptable to State, CEA, and STR.

I recommend that you pursue Option E, with Option B as a fallback, with the other relevant parties in the White House--Harlow, Flanigan and Burns--or authorize me to do so for you./7/

Washington, undated.

You may recall that in our recent conversation regarding beef imports you asked me to consult with the cattle industry and Congressional leaders regarding a possible modest increase in the estimated import level for 1969./2/

I have now completed those consultations. Of course, the people I talked with would be most happy if we held imports to our current estimate of 1,035 million pounds, and that is the course of action which I recommended to you during our meeting. While they would grumble some, they would understand why we might have to quietly permit the import level to increase to 1,050 million pounds during the coming weeks. A further increase to l,060 million pounds would result in more grumbles, but again they would live with the result if you considered such a level necessary for overriding foreign policy reasons.

Further weakness in domestic cattle prices would truly be politically undesirable. Prices have deteriorated about 15 percent from the peak period last summer or about $6.00 per hundredweight. Most students predict that cattle prices will continue to remain quite strong. On the other hand, an increase in unemployment and further consumer resistance may have a weakening influence on beef prices. Such possibility is a worry to me.

Washington, October 16, 1969.

SUBJECT
Meat Imports

I understand that Secretary Hardin has completed his Congressional consultations and has found that resistance to a small increase in imports during the current quarter is not insuperable./2/ The quantity involved is so small as to be largely symbolic, though it is of some importance to Australia even so. It will also be welcome to the Central Americans, who claim that we have encouraged them to specialize in beef production and therefore should be more receptive to their exports.

My main purpose in writing this memo is to remind you of the domestic aspects of the beef situation. There is great concern not only about meat prices in general, but especially about hamburgers and frankfurters. These are the products most dependent on an adequate supply of imported beef. Last week there were hearings before a House subcommittee in which considerable consumer sentiment on this issue became apparent. If the Administration now decides on a gesture towards increased imports this will certainly be a plus as far as the domestic consumer is concerned.

Paul W. McCracken

Washington, undated.

SUBJECT
Responses to Prime Ministers Gorton and Holyoake on Meat

Attached at Tabs A and B respectively are proposed letters for you to send Prime Ministers Gorton and Holyoake,/2/ which would inform them that we are increasing the amount of meat they can export to us this year. Gorton wrote you directly on the subject (Tab E)/3/ and Holyoake raised the matter during his recent visit./4/

Secretary Hardin has gotten the cattlemen to agree very reluctantly to an increase of 25 million pounds in our import level, pursuant to your recent request to him (Hardin letter at Tab D)./5/ He continues to feel, however, that the increase would cause significant domestic political problems. Bryce Harlow agrees that the move could cause trouble on the Hill./6/

We can also reallocate 21.5 million pounds of shortfall in imports which had been expected from Canada. The foreign suppliers already expect this amount, however, so it achieves no political gain with them.

Australia will get 25 million pounds and New Zealand will get 11 million pounds of this combined increase. Most of the rest will go to Latin America, incidentally, and will give us a point with them for the forthcoming IA-ECOSOC meetings.

Your letter would be especially timely for Gorton. A recent Gallup Poll in Australia showed a surprisingly sharp swing toward his Liberal opposition for the October 25 election. It will certainly be the closest Australian election since 1961 and, if Gorton wins by only a narrow margin, could set the stage for a Liberal victory in 1972. Voter displeasure over Gorton's Vietnam policy and uncertainty over U.S. policy in the Pacific are issues cited as hurting him. A forthcoming step by you at this point could thus certainly help.

Holyoake faces an election in late November and has only a one-seat majority at present. Your step would also help him significantly.

1. That you sign the letter to Gorton at Tab A.

2. That you sign the letter to Holyoake at Tab B.

3. That you sign the letter to Secretary Hardin at Tab C, thanking him for helping you on this foreign policy issue./7/

Washington, October 22, 1969.

Dear Mr. Secretary:

I am writing to ask you to give further consideration to the possibility of licensing imports of nickel for defense rated orders from the Le Havre plant of Societe Le Nickel (SLN), which Deputy Director Russell of OEP has discussed with Treasury officers. You wrote me on September 24 about this and other proposals to open up additional sources of nickel during this period of critical shortage./2/ You indicated that you had asked the Department of State to explore the situation with SLN, and suggested that the question of importation from SLN for defense orders then be considered in the National Security Council.

In the interim, I have had an exchange of letters with the Department of State (copies enclosed) about this proposal. Assistant Secretary of State Trezise endorsed the proposal. He has suggested that SLN be asked for assurance that the material does not come from Cuba, and that the French Government be asked to so certify./3/

As I understand it, this procedure would probably eliminate the need for issuing licenses. OEP is prepared, if you agree, to stimulate orders to SLN by defense producers, or applications for licenses if they are required.

The request in this letter is a separate matter from consideration of releases from the stockpile. It is an action I hope we can take under any future developments in the nickel strike situation, since the US will be short of nickel for at least six months after the strike is settled. Hence, I do question that National Security Council consideration is required of the proposal in this letter. I do defer in this, however, to Dr. Kissinger.

As I did with my letter of October 10, I am sending information copies of this letter to the others concerned, who in this case are the Secretaries of Commerce and Defense, Assistant Secretary of State Trezise, and Messrs. Flanigan and Kissinger.

Will you please let me know your reaction.

Sincerely,

G.A. Lincoln

Washington, October 27, 1969.

SUBJECT
Legal situation on Mint nickel

Of the alternative actions suggested for the Government to meet the current nickel crisis, the sale of a substantial part of the Mint inventory of nickel is the most attractive but it has raised several objections. These objections, not necessarily in the order of their importance, are that the Treasury Department may not want to reduce its inventory, that if they do so a large portion of the material will automatically go into the stockpile, that if they do so they will have no way to recover their investment in the metal, that the metal in the inventory may not be in a form convenient for industry use, that the Government may not be able to replace the nickel, and that the Government's authority to arrange for special "chosen instrument" handling is limited. I shall deal with each of these objections.

It is the function of the owning agency to declare property excess to its needs, and each agency is required by law "continuously" to survey property under its control to determine whether it is excess. The agency's hand, however, is not entirely free, since the President may (by Section 205(a) of the Federal Property and Administrative Services Act/2/ if statutory authority is needed) prescribe policies and issue directives governing the agencies in their performance of functions with respect to their property. Thus it was that on September 16, 1966, in connection with his efforts to cut Federal expenditures, President Johnson issued a statement to the departments and agencies requiring them, among other things, to review inventory levels of all supplies on hand and "whenever the quantity of an item is larger than necessary" take appropriate action including "reporting it excess."/3/ It would be difficult to conjure up a greater justification for special action to accomplish the declaration of material as excess than the current one. To breach the national defense stockpile while the government itself has in another inventory ten or more years' supply for the uses of that inventory, is virtually unthinkable.

The Strategic and Critical Materials Stock Piling Act/4/ does require that Government materials determined by the owning agency to be surplus to its needs "shall be transferred" to the stockpile to the extent that the stockpile goal has not already been met. This would appear to make 5000 tons of any nickel found by Treasury to be excess to its needs go to fill the stockpile goal for nickel. However, the same Act exempts from that requirement material necessary to make up any deficiency of supply for the current requirements of industry as determined by the Secretary of Commerce. Clearly the current requirements of industry are faced with a deficiency of supply far greater than the prospective Treasury excess, and the Secretary of Commerce is, I understand, prepared to make the necessary determination.

While I do not think that the consideration should by any means be controlling, I am optimistic that the Treasury Department will not have to see a substantial part of their investment in nickel go to miscellaneous receipts as the proceeds of surplus sales. The Federal Property Act provides (Section 204(c)) that where the property disposed of was acquired by the use of a fund either not appropriated or by law reimbursable, the proceeds of the disposition may be turned over to the agency that declared the property excess. Because the purchase of this nickel was, I presume, financed by the Coinage Metal Fund created by Section 3528 of the Revised Statutes, it would seem to me that the proceeds of this disposition, be they cash or nickel, could properly go to Treasury.

Where a material is declared excess the Administrator of General Services enjoys wide latitude under Section 203(e)(3) to negotiate such a disposal contract as will serve the public interest. The contract of disposition may have to be made with International Nickel Company because it is probably the only instrument by which the users' requirements as to form of the metal may be approximated, and also because it is probably the only contractor who might give assurance of later delivery of nickel to the Government. A contract calling for the return to the Government of nickel pound for pound may be more than we can hope for, but there are lesser blessings more likely to materialize such as an agreement to put the proceeds of sale in escrow and deliver nickel to the full value thereof when production is again available, or perhaps a simple call option at prevailing market price but at a generous rate. The negotiation of the best possible deal is within the capacity as well as the authority of the General Services Administration staff.

Charles H. Kendall

Washington, November 7, 1969.

Dear General Lincoln:

By way of confirmation of our telephone conversation on the subject,/2/ 9,000,000 pounds of nickel held in the Bureau of the Mint inventory will be released to GSA for disposal at the direction of the Office of Emergency Preparedness. Consumption, I understand, will be defense-related. Because this nickel is held as a monetary asset on the books of the Treasury, it will be necessary to reimburse the Coinage Metal Fund of the Bureau of the Mint.

Your letter of October 27, 1969, requested comments on a proposed Memorandum to the President on measures which could be taken to alleviate the existing nickel shortage. In light of the decision to release some nickel at this time, I understand that you do not intend to transmit this Memorandum to the President./3/

Even though the Memorandum will not be transmitted, I wish to comment upon its content. In discussing the Mint stockpile, the draft of the Memorandum proceeds assuming that the Mint nickel inventory is adequate for ten years based on the present rate of consumption.

However, the Treasury-sponsored legislation authorizing production of the Eisenhower cupro-nickel dollar has passed the House.

The Senate has passed a bill providing for the minting of a cupro-silver dollar. A conference between the House and Senate will be necessary to work out the differences, but it would appear that a coinage bill greatly increasing nickel consumption rates will be enacted during this Congress.

Therefore, Treasury must manage its nickel inventory so as fully to allow for and meet such contemplated consumption rate increases.

Accordingly, in light of (1) release of 9,000,000 pounds of nickel at this time and (2) anticipated passage of cupro-nickel coinage legislation, planning projections must be predicated on a three-year supply with current inventory, instead of the ten-year supply related in the Memorandum.

In your letter of October 22, 1969,/4/ you asked that Treasury make certain changes in its nickel certification arrangements with France. You indicated that the Department of State supports your request that arrangements be made whereby Societe Le Nickel, S.A. will be allowed to export nickel of non-Cuban origin to the United States.

While we share your concern with respect to the existing nickel shortages, we seriously doubt the wisdom of this proposal.

The Department of State, in a letter dated October 17, 1969,/5/ makes clear that its recommendation is limited to nickel of non-Cuban origin and indicates that anything further would immediately confront us with much broader problems with respect to our policy towards Cuba.

However, even the limited change proposed by the Department of State would raise these same problems, in our view. The basic thrust of the French certification procedure is to permit innocent French steel producers to purchase non-Cuban nickel from SLN and export their nickel-bearing steel products to the United States. At the same time, the procedure precludes SLN itself from marketing any of its French nickel production in the United States. Were it not for this provision, the embargo would be toothless. SLN could readily purchase Cuban nickel, market it in Europe, and sell its non-Cuban nickel in the United States.

If that were permissible, there would be no reason for nickel users in Germany, Austria, Finland, the United Kingdom, or other European countries, to refrain from purchasing Cuban nickel either directly from Cuba or indirectly via SLN, and marketing the product thereof in Europe while maintaining their United States market by use of non-Cuban nickel.

The fact is that our restrictions on SLN's ability to market its non-Cuban nickel in the United States have successfully deterred those European countries from buying Cuban nickel, and have deterred other nickel consumers (e.g., certain Swedish mills) from doing so. To remove the restrictions on SLN, as now proposed, would vitiate this entire effort.

In this connection, I want to make clear that the restrictions on SLN as a purchaser of Cuban nickel are equally applicable to the U.S.S.R. which is also a purchaser of Cuban nickel, wherever this can legally be accomplished. According to technical advice furnished to the Treasury, SLN markets nickel oxide, refined nickel, and other nickel products produced from Caledonian ores; markets nickel oxide of Cuban origin; and markets fire refined nickel and nickel products produced from Cuban nickel oxide. Thus, nickel products imported from France may be made either from Cuban or Caledonian materials, and the Treasury therefore embargoes all such SLN products.

On the other hand, we have not embargoed SLN-produced ferro-nickel imported directly from New Caledonia into the United States, because no Cuban nickel exists in the Pacific and it would be impossible to contend that there is any risk of Cuban material entering the United States in this manner.

A parallel situation exists with respect to Russia, and our policy has been applied consistently. Specifically, Russia markets nickel cathodes and nickel salts. We have been informed that it is not presently believed possible for Russia to produce cathode nickel from Cuban material. Accordingly, we have not embargoed Russian cathode nickel under the Regulations, any more than we have embargoed Caledonian ferro-nickel.

On the other hand, we have embargoed nickel sulfate from Russia since this material could readily be produced by Russia from Cuban nickel oxide or Cuban nickel sulfide. Equally, Czechoslovakia markets various forms of nickel which can be produced in Czechoslovakia either from Russian or Cuban materials. We have therefore embargoed all such nickel materials from Czechoslovakia.

Quite apart from the considerations discussed above, which in my view militate against the proposal to change the certification arrangements with France, there is a most practical objection as well. It is my understanding that an approach to SLN would be virtually futile in any event, since SLN has already indicated its output is fully committed elsewhere and it would have little, if any, French nickel available for defense-rated needs in the United States.

I am sending copies of this letter to the Secretaries of State, Commerce and Defense, in view of their interest. I understand the Department of Defense plans to inform you of its views on this subject shortly.

Sincerely,

David M. Kennedy/6/

Washington, November 26, 1969.

SUBJECT
Proposed Reduction of Strategic and Critical Materials Stockpiles

Dr. Kissinger's office (General Haig) advised your office verbally that the Bureau of the Budget had submitted a proposal to the effect that the Strategic and Critical Materials Stockpile be abolished. It also was reported that a preliminary White House discussion resulted in a verbal modification of the BoB proposal so as to impose only a 50 percent reduction. Whether this means 50 percent reduction in objectives, or in physical inventories, has not been made clear. My office has not seen the original BoB proposal, nor heard the modification, hence we have only a very general picture of its nature. It is alleged to be based on the presumption that the strategic planning factors underlying the present stockpile objectives are unrealistically conservative. As of 31 October 1969, these inventories totaled $6.75 billion at current value. The inventory objectives totaled $3.84 billion.

With the advent of NSDM-27,/2/ it certainly is logical that an examination of stockpile objectives be conducted to reflect the policies in that decision.

There are two major factors that should be considered in the examination of stockpile objectives. First, certain countries or areas of the world may be assumed inaccessible as suppliers of basic or raw materials. The JCS developed a list of assumed inaccessible countries in a future non-nuclear engagement. This information was furnished OEP on 6 March 1968./3/ Naturally, this list should be re-examined in the light of NSDM-27. Second, since the possibility exists that it might become necessary in the future to engage in a non-nuclear conflict of such magnitude as to warrant the application of emergency powers, the need for strategic and critical materials under such circumstances must be provided for. The planning of requirements and production for military items, which forms the basis for computing the DoD strategic and critical materials needs, is specified in the DoD 4005 series of directives. This provides the data to identify needs and capabilities to meet such an emergency.

The existing stockpile planning assumptions were established by Presidential decision, 31 October 1968, following a lengthy study by a special committee and discussion in the NSC. This approved planning basis represented a compromise between the views of DoD and OEP.

DoD believes that stockpile objectives should be computed on the basis that supplies of materials will remain available to the United States, throughout the period of the conflict, from all normal world sources except those specifically excluded by JCS for strategic reasons. OEP had long favored a much more conservative assumption as to accessibility of sources. The 1968 decision envisages very limited source accessibility (U.S., Canada, Mexico and the Caribbean area) for the first year of war, and the much broader JCS view for subsequent years.

Were the DoD strategic assumptions to be fully accepted, in lieu of the 1968 compromise decision, a reduction in objectives of perhaps 25 percent in total dollars might result. Re-evaluation of the DoD guidance, in light of NSDM-27, could have an even greater effect. In either case, however, the effect on reducing objectives would vary greatly between individual materials because no two exhibit the same source pattern.

It should be pointed out that the Government inventories contain nearly $3 billion worth of materials in excess of existing stockpile objectives. One billion of this has been authorized for disposal and the balance still requires Congressional authorization. Thus, if attainment of additional funds is the prime objective, a more aggressive disposal policy could result in a significant increase in Government income.

I recommend that in any discussion of this matter you take the position that the entire basis of stockpile planning should be re-examined in light of NSDM-27, including maximum tightening of all planning and safety factors, but that no arbitrary across-the-board cut should be made in stockpile objectives.

Barry J. Shillito

Washington, November 26, 1969.

SUBJECT
Stockpile

Although I do not know the specifics of the Bureau of the Budget stockpile proposal, e.g., whether they propose a 50 percent cut in inventories or in objectives, the following information may assist you in evaluating the proposal. This paper describes the national stockpile, discusses disposal programs and problems, and summarizes the stockpile objectives system.

The stockpile exists pursuant to legislation; the value of the current inventory in the stockpile is $6.7 billion. Of this total, $2.87 billion (43 percent or nearly half the inventory) is excess to our current stockpile objectives. Tab A/2/ lists the commodities in the stockpile, showing inventories, objectives, excesses, and quantities available for disposal.

GSA, which manages the stockpile under OEP policy guidance, has been selling excess stocks as rapidly as legislation, the market, and other conditions permit. (OEP Deputy Director Fred Russell devotes a great deal of his time and talent to assisting GSA in legislation and sales.) More than $2 billion in excesses (Tab B gives annual and cumulative figures) has been sold in the past five years. We expect to sell about $240 million in excesses during Fiscal Year 1970. Even if the current stockpile objectives were disregarded by the Executive Branch and Congress were willing to provide authorizing legislation, we estimate that GSA could sell no more, at a maximum, than another $580 million (see Tab C) within one year after the restraints were removed. ($360 million of this amount would be from nickel and copper; the latter was the material involved in the major criticism of President Johnson for stockpile releases.)/3/ The other commodities cannot be sold rapidly, for a variety of reasons. As a practical matter, Congressional and other restraints would largely prevent the sale of additional materials.

There are now rigid restrictions on sales from the stockpile:

a. Legislative authority is required to make such sales. Congress has vigorously rejected omnibus disposal legislation in the past.

b. The law provides that sales must be made in a way which does not destabilize the market.

c. The Department of State can object to disposals on the ground that they will have adverse international effects. (Only the President can overrule such objection by State.) A current case in this category is tin; we would like to sell excess tin but State has maintained that such disposals would be inimical to our relationships with Bolivia and Peru.

(Tab D lists the twelve excesses of highest dollar value, and the obstacles to disposing of them.)

There are at present eight bills on stockpile sales being considered by the Congress. The one that has the best prospect of early enactment is the cadmium bill, which would involve a total of about $14 million. I propose to seek a meeting with Senator Symington, who is Chairman of the key Senate Sub-committee, to ask his help with these bills, but my advisors are not very optimistic.

OEP is proposing legislation that, if passed, should alleviate significantly the existing legislative obstacles to our disposal efforts. There is serious question, however, that such legislation will win approval. Even minor bills on stockpile matters meet major difficulties in Congress. It is very difficult to obtain legislative approval for detailed items for disposal, partly because Congress will not act without industry agreement.

Congress is jealous of its authority over all disposals other than those made by the President for the common defense under Section 5 of the Strategic and Critical Materials Stock Piling Act. Arbitrary action on the stockpile would likely further estrange an already distrustful Congress. Congressional distrust of the Executive Branch management of the stockpile was made very explicit to me during my confirmation hearings earlier this year, in the form of questions by Senators Symington and Stennis. Senators Symington and Russell, in an earlier OEP confirmation hearing in 1967, said that they viewed with apprehension the constant downgrading of the estimates of what is needed in the stockpile in case of national emergency in order to accommodate current economic needs.

In summary, as far as disposal of materials excess to our objectives is concerned, the problems are with the Congress and with industry; the Executive Branch has been making every reasonable effort to push authorized disposals.

Current stockpile objectives are based on a policy determination by the President on October 31, 1968, following a report by an interagency Special Committee on Stockpile Objectives, which was presented by the Director of OEP to a meeting of the National Security Council./4/ Since that Presidential determination, the objectives have been calculated on the basis of the need to cover estimated shortages of materials for a three year emergency period, with substantial allowances being made for supplies from sources outside the United States during the second and third years (the JCS provide assumptions as to accessibility of the materials, and State provides assumptions as to political and economic reliability of the source country or area). Specific objectives have been established by OEP with the assistance of an Interdepartmental Materials Advisory Committee which includes representatives from Commerce, State, Defense, Interior, Bureau of the Budget, and other interested departments and agencies.

The United States is critically dependent in peacetime as well as in war on certain strategic materials not found in the United States. Our dependence is growing. Because of such shortages, we are vulnerable to blockades, political actions by other nations and even to strikes within friendly nations--strikes that cannot be controlled by some of our closest allies.

It seems evident to me that we need to maintain reserves of such critical items as copper and nickel, for example. It is worth noting in this connection how the nickel supply to the United States was virtually cut off for a long period by strikes in Canada.

Any major changes in stockpile objectives should clearly be made on the basis of a review of our national security requirements rather than on budget considerations alone. I have been developing a plan for a national materials study that would include a review of the assumptions and procedures for establishing stockpile objectives. I believe such a study should be conducted under the auspices of the National Security Council. This study should examine the full range of our stockpile policies, but if properly done, should be a "national materials study", going beyond narrowly national security aspects. The last such study was the Paley Report in the early 1950's. The Department of Interior agrees with my view on the requirement for such a study, and also agrees with me that the current stockpile should not be arbitrarily run down for a budgetary purpose--like the purpose which was alleged to have motivated President Johnson in the release of copper which occasioned massive criticism from some quarters. (This release of copper constituted a substantial portion of the $2 billion sales mentioned above.)

Defense Production Act funds are available to OEP for the initiation of the study--an enterprise that might be attractive enough to warrant mention in the State of the Union message; however, OEP under current budgetary restrictions does not have the resources to lead such a study.

Finally, I do note that the Bureau of the Budget has never made any proposal to me concerning the stockpile, other than an informal exchange with their Deputy Director who at that time suggested a "go at the stockpile after Christmas". I assumed he meant an NSC or other interagency study--to which I have long been committed.

G.A. Lincoln/5/

Washington, December 5, 1969.

SUBJECT
Meat Import Program for 1970

I met today with Secretary Hardin, John Whitaker of John Ehrlichman's staff, and Bryce Harlow on the meat import program for 1970. Three issues were discussed:

1. Whether to seek continued voluntary restraints by foreign exporters or apply quotas ourselves.

2. The level of imports.

3. The allocation of imports as between the traditional suppliers (Australia, New Zealand, Ireland) and the Latin Americans.

All agreed that voluntary restraints were far superior to quotas. The main issue was thus the import level. Our objective was to minimize the level for domestic political reasons while offering enough to the foreign suppliers to preserve the voluntary restraint agreements.

Secretary Hardin felt strongly that our initial negotiating position should be an import level of 1,050 million pounds, allocated among the suppliers a la 1969, plus an additional 5 million pounds for Latin America to exemplify the "special relationship." Imports of 1,050 million pounds in 1970 would represent virtually no increase over actual imports in 1969 and only a 15 million pound increase from the agreed restraint levels of this year. I therefore expressed doubts that Australia and perhaps New Zealand would be willing to negotiate voluntary restraints at that level. They might calculate that they would come out better if we applied quotas, even at the lower statutory level of 1,000 million pounds. This is because they would expect the quotas to be allocated on an historical (5-year) basis, under which they would receive a much larger share of the total than they got in 1969 and would get in 1970 under the voluntary approach, which already encompasses substantially favored treatment for Latin America.

It was clear at the meeting that you might wish to raise the issue with the President if you were dissatisfied with the decision. Despite my being overruled, I do not recommend further effort at this point because:

1. The 1,050 plus 5 for Latin America is only a first negotiating position, which State has already begun trying out on the suppliers.

2. Secretary Hardin is clearly prepared to fall back to 1,060 plus 5, or even 1,075, if necessary to secure voluntary agreements.

3. Australian and New Zealand meat has been entering the U.S. via Canada in excess of agreed amounts and there is thus a case for being tough with them as a result; I know of no particular foreign policy reason to be particularly accommodating to them at present.

4. The add-on for Latin America should give us a good point in the ongoing IA-ECOSOC dialogue.

5. Secretary Hardin has a point in wanting to maintain some leeway in the program for additional allocations later in 1970, as pressures build up for both economic and foreign policy reasons as they did this year.

We should know within a week or ten days whether the 1,050 plus 5 level is negotiable. If it is not, we may need a Presidential decision at that time.

Washington, December 6, 1969.

Dear Mr. Prime Minister:

Your letter about the arrangements on meat imports from Australia and other countries into the United States was received with a full appreciation of the problems which they cause./2/ I assure you that this Administration is thoroughly aware of the significance of Australia's meat trade with the United States and of the importance which your country attaches to its access to the U.S. market./3/

During the last several months we have undertaken a complete review of our meat import policy for the remainder of 1969. In this review the interests of Australia and the other suppliers of meat to our market were kept fully in mind. I recognize the difficulties that the restraint program has caused for the Australian meat industry and the Government of Australia, and regret that we were unable to grant an increase in Australia's allocation. We received similar requests for increased allocations from several other countries, also with compelling reasons. Under these circumstances, and given the quota provisions of the Meat Import Act, no revision of the current program was possible.

As you know, however, we were able to reallocate nearly 15 million pounds of the expected Canadian shortfall to Australia. I hope that this amount will be of benefit to your country.

You have my deep appreciation for the cooperative attitude demonstrated by your government and the Australian meat industry. We will do all we can to further the spirit of goodwill and cooperation which exists between our two countries.

Sincerely,

Richard Nixon

Washington, December 15, 1969.

I accept your recommendation and the recommendations of the Secretaries of State, Commerce, and the Interior regarding the need for additional supplies of nickel to meet defense production requirements./2/

In accordance with the provisions of Section 5 of the Strategic and Critical Materials Stock Piling Act, as amended (50 U.S.C. 98(d)), I herewith determine that the release of up to 20 million pounds of nickel from the National Stockpile is required for purposes of the common defense. The rate, method, and forms of the nickel release and its replacement shall be as you deem appropriate.

This use of the stockpile in a situation short of a national emergency should not be considered a precedent for the future, pending further review of stockpile policy./3/

In carrying out this responsibility, arrangements should be made to assure that all replacement of nickel is in upgraded forms without the need to seek additional appropriations for this purpose.

Richard Nixon

In his December 13, 1969, memorandum to the President recommending approval of nickel sales from the stockpile (see footnote 3, Document 419), Henry Kissinger indicated he was forwarding separately a more detailed explanation of the issues and problems associated with the stockpile of critical materials and implied that a NSSM would be issued to resolve them. No such NSSM was found.

On December 19 Peter Flanigan sent Kissinger a memorandum recalling a discussion of stockpiles and requesting a copy of the study if it had been completed. He also referred to his responsibility for the Office of Emergency Preparedness. On Flanigan's memorandum Kissinger wrote: "Send him Lynn memo--but tell him to lay off--explain Pres. feelings," and a note by Haig reads: "I've done this." (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 396, Stockpile) No memorandum by Larry Lynn, who staffed stockpile issues at the National Security Council, has been found.